Market Update 5/30

Bloomberg reports that government efforts to forestall foreclosures are working, but that the number of people going into foreclosure is nonetheless rising twice as fast as those getting back on track with payments. In the meantime, banks are accelerating the process, so that a 64% increase in foreclosures from last year resulted in a more than doubling of the number of homes seized by banks.

The WSJ reports that Fed President Geithner is at the center of the storm of criticism over the Fed’s rescue of Bear Stearns. Geithner was convinced a deal had to be done after the NY Fed staff ran simulations of the probable outcome of a bankruptcy filing. In a related story, Fed Vice Chairman Kohn told a New York audience last night that the Fed may keep the discount window open for securities companies, but that tighter regulation would be required in exchange. The lack of regulation and difficulty pinpointing counterparty risk in the CDS market was likely the chief reason the Fed felt it necessary to prevent the bankruptcy of Bear.

The WSJ says the recent underperformance of Ford’s credit union is evidence that car loans are starting to perform like home loans. Many are upside down, with the loan exceeding the value of the underlying asset, and delinquencies are rising. The credit union did not make mortgages.

The CFTC is conducting a nationwide probe of trading in the oil futures market in response to political pressure, according to the WSJ, but few expect they will find anything material. Oil prices have fallen more than $5 in the past two days, to below $125.70 last night. The Dec 2016 contract has fallen even more, from $142.09 to $128.34 since peaking on Wednesday last week. The break in futures has been so violent that an increasing number of analysts say it likely signals the start of an even bigger move down in spot prices.

Last night, Japan’s household spending fell 2.7% in April, the most in 19 months, while retail spending in Germany fell unexpectedly for the second consecutive month. In the UK, consumer confidence fell to its lowest level since 1990.

Today, consumer spending is expected to have risen 0.2% in April, which means it likely fell 0.1% in real terms, while income is expected to have risen 0.1%. the Chicago PMI is expected to be little changed at 48.5 and the University of Michigan consumer sentiment index is expected to be unchanged from preliminary May readings of 59.5, a level that was the lowest since 1980.